John was a high school teacher earning $ 80,000 per year. He quit his job to start his own business in pizza catering. In order to learn how to run the pizza catering business, John enrolled in a TAFE to acquire catering skills. John’s course was for 3 months. John had to pay $2,000 as tuition for the 3 months.
After the training, John withdrew $110,000 from his savings account. He had been earning 5 percent interest per year for this account. He also borrowed $50,000.00 from his friend whom he pays 6 percent interest per year. Further, to start the business John used his own premises. He was receiving $12,000 from rent per year. Finally, to start the business John uses $50,000 he had been given by his father to go on holiday to USA.
John’s first year of business can be summarized as follows:
Item Amount $
Revenue- Pizza Section 400,000
Revenue- Beverages Section 190,000
2 Cashiers (wages per worker) 55,000
Pizza ingredients 50,000
Manager 75,000
3 Pizza bakers (wages per baker) 60,000
Equipment 10,000
Based on your calculated accounting profit and economic profit, would you advise John to return to his teaching job? Show your work
Answers
Answer:
Explanation:
John can earn from teaching $80,000 annually
For starting business of pizza catering John will incur following expense
Tuition for catering skills $2,000
Opportunity cost for withdrew of funds ($110,000 * 5%) $5,500
Interest for Borrowing from friend ($50,000 * 6%) $3,000
Opportunity cost of Rent from premises $12,000
Total opportunity cost $22,500
Revenue: Revenues from Pizza $400,000
Revenue from Beverages $190,000
Total revenue $590,000
Expenses: Cashier wages ($55,000 * 2) $110,000
Pizza ingredients $50,000
Manager salary $75,000
Pizza bakers wages ($60,000 * 3) $180,000
Equipment $10,000
Total Expense $425,000
Net Income - Accounting Profit ($590,000 - $425,000) = $165,000
Less opportunity cost $22,500
Economic Profit $142,500